The preferred creditor puzzle in sovereign debt markets

a column by Tito Cordella and Andrew Powell for VOX: CEPR’s Policy Portal

Countries almost always repay loans from the IMF and the World Bank before others, even though this preferred treatment rarely appears in legal contracts.

This column presents a framework to investigate this puzzle. It argues that the ability to restrict lending allows international financial institutions to lend at the risk-free rate and creates incentives for repayment. IMF and World Bank loans are thus complementary to commercial lending.

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Hazel’s comment:
I think I understand the issues involved a lot better now than I did before reading this.

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